Alibaba under pressure to turn profits from its AI business in China

Alibaba will highlight its artificial intelligence strategy in its latest quarterly results, but analysts say the company still struggles to turn years of spending into real profits.

Alibaba and rivals Tencent and Baidu have spent billions building large language models and adding AI to their platforms since ChatGPT’s success. However, Chinese consumers avoid paid AI services, making it hard for these firms to earn quick returns despite heavy spending.

Alibaba targets business clients after weak consumer demand

Over the past year, Alibaba has made huge investments in AI with upgrades and demonstrations, such as integrating its Qwen-Long model directly into its cloud platform. These efforts show how determined the company is to stay ahead of rivals like Tencent and Baidu, and prove to investors that it can produce visible results from years of spending. 

But despite its frequent product launches and marketing campaigns, Chinese consumers aren’t as willing to pay for AI subscriptions as customers in Western markets. 

For this reason, Alibaba and its competitors have begun selling AI through cloud-based application programming interface (API) services to enterprise customers. The plan is to encourage large companies to adopt these tools at scale to recover the revenue the consumer market has failed to deliver. 

Moving to enterprise clients doesn’t solve all of Alibaba’s problems; instead, it has created new challenges that could be just as difficult to manage. The industry’s biggest issue is intense competition because companies undercut each other to attract corporate customers. The problem with this approach is that the competing companies would sacrifice the margins they need to convince investors that their investments weren’t in vain.

For example, Alibaba slashed prices on its Qwen-Long model’s API by a huge 97% and started charging 0.0005 yuan for every thousand tokens processed. ByteDance followed suit a month later and lowered the cost of its Doubao model by 63% to make it 2.6 yuan per million tokens. 

Analysts say these sharp discounts may attract customers searching for affordable AI solutions in the short term. Still, the companies will struggle to generate enough profits in the near future. 

Alibaba also has to worry about the increasing number of open-source AI models in China. Developers like DeepSeek released their models freely to the public to give other businesses, researchers, and startups access to advanced AI without licensing fees.

This open-source approach may spread AI adoption across the economy, but it also largely reduces the incentives for enterprises to purchase similar products with a price tag.

Price cuts and tough competition slow down Alibaba’s growth

Alibaba’s cloud business is the main host for its AI services, and in the April–June quarter, it reported a revenue of 31.4 billion yuan ($4.4 billion). Data compiled by LSEG estimates this is about a 4.3% increase from the previous quarter and an 18% rise compared with the same period a year earlier.

The numbers may seem healthy at first, but compared to Alibaba’s past performance, where the company delivered faster growth in its cloud performance, they’re less impressive. Analysts also say that even though the company is expanding, its pace is extremely slow due to the high competition as it tries to recover strong financial returns for its large AI investments. 

Alibaba’s e-commerce segment, which still makes up the largest overall revenue, also struggles in the face of China’s economic weakness and aggressive competition. Tight household budgets in the country have caused consumers to be cautious of their spending. 

The smartest crypto minds already read our newsletter. Want in? Join them.